Real Estate tips: Housing price - More than what meets the eye

Feb 23 2013, 09:45 IST
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There are many costs that add on to reach the final price of a property. There are many costs that add on to reach the final price of a property.
SummaryThere are many costs that add on to reach the final price of a property.

One can add about Rs 1 lakh for the same.

TAXES: The major taxes are stamp duty (5 per cent), registration cost (1 per cent), VAT (1 per cent), and service tax. Usually they account for 8-10 per cent of the basic cost.

INTEREST COSTS

The schedule of payment is usually tilted in favour of the developer. In most cases, hardly 5-10 per cent is left as balance, paid on possession. Almost 90-95 per cent of the cost is paid in two-three years while possession is scheduled not before five years. Since the buyer pays almost everything and gets no returns, he loses interest on this money. This should be added to the total cost.

On an average about 40 per cent of the total cost is paid during the first year after booking, 30 per cent in the second year, and 20 per cent in the third year. (See table). Consider the delivery time as five years and an average interest rate of 9 per cent. One must calculate the interest cost of the first tranche for five years, the next tranche for four years and the third tranche for three years. This is simple interest that adds to the cost.

BREAKING EVEN

As we saw, the flat that was quoted at Rs 3.10 crore turned out to be Rs 3.87 crore. After factoring the interest cost it ballooned to Rs 5.09 crore. This calculation has been done without considering a home loan, which if done, would bloat the cost further. “One may argue that the buyer is not paying taxes to the developer, but one must also note that taxes and interest are paid while acquiring the flat. Will the buyer forego this cost while selling the flat?” asks Shah.

From an investment point of view, if the rate of the same flat is quoted as

Rs 28,000 per sq ft in future, one should not misunderstand that as appreciation or profit of Rs 5,000 per sq ft because he is incurring a loss of Rs 9,000 per sq ft due to interest cost. (Refer table). In fact even when his flat is quoted at Rs 40,000 per sq ft, the buyer would have reached just about break even point. The buyer must be aware and be ready to shell out much more than what meets the eye.

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